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“LEGALITY OF EMPLOYMENT BONDS IN INDIA”

INTRODUCTION

The shrinking national boundaries and rising international business having opened a sea of opportunities for the Indian workforce has, as an obvious repercussion, witnessed a steep rise in employee's hunt of better paying employers and vice versa. The employers in this scour of employees often are bereaved of their valuable assets and struggle to retain their skilled employees. The attrition is not a mere deprivation of skilled employees but also loss and misplacement of confidential data, goodwill and reputation in the industry, causing thereby economic losses, as a necessary repercussion. One of the various mechanisms deployed by the employers to propitiate and retain their employees is to impart sets of specialized training. This works as a double edged weapon, as training imparted to them implies, as an obvious fact, a better performance in discharge of their duties. On the other hand, the employers utilise this as a disguise in retaining them by having the employees sign an employment bond, requiring the employees to stay for a stated minimum duration, a breach of which would result in liquidated damages to be borne by such departing employees. This article is a humble attempt to delve in the essential legal validity and outcomes of such bonds and their breaches.


IMPARTING TRAINING: EXCEPTION TO THE GENERAL RULE


In India, restrictive or negative covenants restricting an employee from joining another employment is governed by the codified provisions of Section 27 of the Indian Contract Act, 1872 (“ICA”), whereby every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

The Delhi High Court in High Polymer Labs. Pvt. Ltd. v. R.K. Mutreja and Anr. (MANU/DE/0190/1982) held that a service bond in restraint of trade by which an employee restricts his future liberty to carry on his trade, business or profession in such manner and with such persons as he chooses is in restraint of trade and hit by Section 27 of ICA.


Reasonable Restriction:


The Supreme Court of India in Superintendence Company of India v. Krishan Murgai (1980 AIR 1717) observed that a contract in restraint of trade by which a party restricts his future liberty to carry on his trade, business or profession in such manner and with such persons as he chooses is prima facie void, but it becomes binding upon proof that the restriction is justifiable in the circumstances as being reasonable from the point of view of the parties themselves and also of the community.’ Therefore, it may be implied that in the event the restrictions imposed by an employer is justifiable and reasonable, the same may be enforceable. Pursuant to some of the landmark judgments by the courts in India, it may be implied that such restraint in order to be enforceable should not be greater than necessary to protect the employer, nor unduly harsh and oppressive to the employee.

In view of Section 27 of ICA and the judicial observations made by Indian courts in relation thereto, it may be implied that a negative covenant imposing restriction upon the employees not to terminate his/her employment with the employer for bond period have generally been considered as restraint of trade and therefore, such restrictions have often been held to be unenforceable.



Imparting Training:


As an exception to the Section 27 of ICA, the courts in India have upheld the validity of employment bonds, where the employer has been witnessed to expend monies towards training of the respective employee. The rationale behind such an exception, as observed in Toshniwal Brothers (P) Ltd. v. Eswarprasad, E. and others (MANU/TN/0511/1996), is that in the event an employee being the beneficiary of any special favour or concession or training at the cost and expense wholly or in part of the employer and there being a breach of the undertaking by the employee of the same, the breach would per se constitute legal injury to the employer. Similarly, in Fertiliser and Chemical Travancore Ltd. v. Ajay Kumar and others (1990 LLR 711) it was held that the trainees who had signed an employment bond; in the event of their prior exit to the expiry date of such a bond, would cause considerable loss to the employer, who would have invested significantly in the form of time, energy and expense in imparting training to such employees.


Quantum of Damage: Key Considerations:


In order to decide whether the parties are free to determine the amount to be paid in case of breach of employment bond in lieu of the training cost, a reference can be made to Section 73 and Section 74 of ICA. Section 73 of ICA provides a general provision for compensation for loss or damage caused by breach of contract (which are silent on the question of damages in case of a breach), whereby in case of a breach of contract, the party who suffers by such breach is entitled to receive, from the party who has broken the contract compensation for any loss or damage caused to him. Section 74 of ICA is applicable in cases where the contract itself stipulates the provisions for liquidated damages recoverable in case of breach. According to Section 74 of ICA, in the event of a contract being breached, if a definitive sum is defined in the contract as the amount to be paid in case of such breach, the party suffering breach is entitled, whether or not actual damages or loss is proved to have been caused thereby, to receive from the party who has breached the contract, a reasonable compensation not exceeding the amount stipulated as liquidated damages.

One of the key questions to be taken into consideration while claiming damages under Section 74 of ICA is that (i) whether the benefits of Section 74 is only applicable if the breach in question results into any loss or damage being caused to the claimant; and (ii) whether the liquidated damages as stipulated in the contract needs to be proved for the purposes of attracting benefits of the said statutory provision. Several case laws have clarified the position that so far as Section 73 is concerned, a party to a contract can claim compensation from the other party who has broken the contract only if he proves that he has sustained loss or damage and that too only to the extent of such loss or damage suffered by him.

On the other hand, Section 74 is intended to meet a different situation altogether where the party complaining of breach is entitled to compensation, whether or not actual damage or loss is proved to have been caused by the breach of the contract. While dealing with the said issues, the Supreme Court of India in Fateh Chand v. Balkishan Das (1963 AIR 1405) has held that Section 74 of ICA entitles the aggrieved party to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach and by so stipulating it merely dispenses with proof of "actual loss or damage", but at the same time it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded only to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach. Similar observations were made by the Division Bench of the Kerala High Court in State of Kerala v. United Shippers and Dredgers (AIR 1982 Ker 281), wherein it was held that in the event where the party complaining of breach of the contract has not suffered any legal injury in the sense of sustaining any loss or damage, such claimant will not be entitled to any compensation.

In order to ascertain the quantum of damages, we may rely on the judgments of various high courts of India, wherein they have emphasis on the reasonableness of the compensation to be awarded to the employer in case of breach of the employment bond by the employees irrespective of what was mentioned under the employment contract. High Court of Delhi in the case of Sicpa India Limited v. Shri Manas Pratim Deb (MANU/DE/6554/2011), had considered the total expenses incurred by the employer and the employee's period of service while deciding the compensation amount and awarded a sum of INR 22, 532 (although the bond stipulates a payment of INR 2,00,000 as compensation for said breach and the employer had incurred expense of INR 67, 595 towards imparting training to the training to the defendant employee) as a reasonable compensation to the employer for breach of agreed bond period of three years (out of which the period of two years of service was already completed by the employee) under the employment contract.

Also, the High Court of Andhra Pradesh in the case of Satyam Computers v. Leela Ravichander (MANU/AP/0416/2011), the defendant was an employee who had abruptly left the company and as per terms of employment bond, was to pay liquidated damages of INR 2, 00,000 along with stipend charges and additional expenses incurred by the company for the defendant. However, the Andhra Pradesh High Court held that such action by the defendant did not cause any damage or loss to the company and it would be unreasonable to acquire such amount from the defendant. An amount of INR 1, 00,000 was fixed by the court as reasonable damages taking into consideration the period of work and the fact that no actual loss was caused to the company had also reduced the compensation amount considering the period of service served by the employee.



CONCLUSION


In light of the above discussions, it would not be appropriate to declare the employment bonds as invalid per se. In circumstances where an agreement is challenged on the ground of it being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests. Therefore in employment contracts, the burden is on the employer to prove that the employment bond is necessary to protect his interest. In general, the conditions stipulated in the contract should justify that it is necessary to safeguard the interest of the employer and to compensate the loss in the event of breach of employment contract. In the event of breach of employment bond, the employer might incur a loss and, therefore, may be entitled for compensation. However, the compensation awarded should be reasonable to compensate the loss incurred and should not exceed the penalty, if any, stipulated in the employment contract. Thus, the courts in India have played a significant role in upholding the employment bonds, on case to case basis, through which it has developed a balance approach towards protection of the interest of the employers without negating the employee’s right to carry on lawful profession or trade completely.
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Did you know?
Whether departmental circulars/ notifications supersede statutory provisions of Maternity Benefit Act, 1961 (“MB Act”)?
Hon’ble Uttarakhand High Court in the matter of Smt. Kavita Pant v. State of Uttarakhand and Others (2017 LLR 467), while observing that the contractual employees directly employed or through contractor are entitled to maternity leave as per MB Act has held that any order issued by the government department cannot supersede the statutory provisions of law constituted by the parliament and thus statutory provisions shall prevail over the departmental circulars/ notifications.

Whether settlement under Section 18 of Industrial Disputes Act, 1947 (“IDA”) debars a workman for claiming provident fund?
Hon’ble Madras High Court in the matter of M. Devadasan v. The Management, Sothern Railways Ltd. (2017 LLR 976) held that after entering into a settlement and post receiving settlement amount against all benefits, thereby giving an undertaking not to lodge any other claim, a workman is not entitled to claim gratuity or provident fund or such other claim in view of provisions of Section 18 of the IDA.

Whether the partners can be treated as employees for the purposes of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”)?
Hon’ble Madhya Pradesh High Court in the matter of Employees Provident Funds Organization v. M/s Ambar Products, Gwalior (2016 LLR 932) while holding the respondent firm out of the purview of the EPF Act, held that partners of a partnership firm could not be treated as employees for the purpose of covering the firm under the provisions of the EPF Act.

Whether the order for back wages mandatorily follows in cases of reinstatement?
While vacating the order of Delhi High Court, directing the respondent to make payment of back wages, Hon’ble Supreme Court of India in the matter of D.T.C. v. Gian Chand (2016 LLR 1233), has held that awarding back wages to the workman without justification is liable to be set aside. However, the court in this case held the employee to be entitled for all other consequential benefits.

Whether termination can be held illegal even if the employee admits his/ her signature on resignation and receipt of payments?
Hon’ble Punjab and Haryana High Court in the matter of Ms. Maya Devi v. Presiding Officer and Another (2016 LLR 191), held that when the workman admits his/ her signature on resignation letter as well as receipt of payment confirming receipt of full and final dues, then he/ she cannot later take plea that he/she has been illegally terminated from her services. The High Court further observed that unless the finding of the lower court is perverse or suffers any palpable error, interference by the writ court is not called for.
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